Fixed Deposit Calculator: Income Clubbing Headache

It is a terrible idea to open a fixed deposit in your spouse’s name with your money. In general, this arrangement is a terrible idea with any taxable instrument. Terrible, because of the complex way in which the interest income will be taxed. Of course this is applicable only if you are a law abiding tax paying citizen!

The tax man has laid specific rules with regard to taxation arising from income clubbing. This is a diverse area and has its own complexities. Bemoneyaware has written a comprehensive article on this: Clubbing of income. I am only interested in two aspects of income clubbing that apply to taxable instruments (fixed deposits in the present case): (a) investing in the spouse’s name and (b) investing in the minor child’s name.

Many seem to think opening fixed deposits in their spouses name or minor child’s name will reduce their tax liability. Unfortunatelythis is not so. If we invest in the name of our minor child we still need to pay tax on the entire interest income. If we invest in our spouses name we will need to pay tax on the income generated from the sum transferred.

A simple illustration will hopefully make this clear: I transfer Rs. 100 to my wife. She opens a fixed deposit offering 10% interest per year (on April 1st). After a year the balance is Rs. 110. I will have to pay tax on Rs. 10 which is the income generated from the sum I transferred. At the end of the second year the balance is Rs. 121 (Rs. 110 plus 10% interest on Rs. 110). Out of the interest income of Rs. 11, Rs. 10 is the interest from (my)Rs. 100 and Rs. 1 is the interest from Rs. 10.

Rs. 10 is the income generated by my spouse from the Rs. 100 I gave her. I don’t need to pay tax on any subsequent interest generated from this Rs. 10 (he/she will have to if applicable). I only need to pay tax on the income generated from Rs. 100, the sum I transferred. Trouble is, as long as the sum remains invested, I always need to pay this tax. Thanks to CA Nitin Soni for clarifying this. This scenario is also applicable if I had gifted the Rs. 100 to my daughter-in-law (but not son-in-law!).

(Photo credit: jessamyn)

Thus the tax liability on income clubbing with spouse (and daughter-in-law) is not zero but is not 100% either! Tax liability on income clubbing with a minor child is still 100%! Tax liability on income clubbing with a major child is zero! Unfortunately in this case, the parent’s access to the transferred sum and income generated is at the discretion of the child!

If I gift my spouse (or daughter-in-law) Rs. 50,000 and they subsequently invest this amount in a FD offering 8.5% interest (compounded quarterly) for say, 5 years, I need to figure out my tax liability (on Rs. 50,000) each financial year. My spouse (or daughter-in-law) will have to figure out their tax liability (interest on interest earned) each financial year. Surely this is a headache for a law abiding tax paying citizen.

If my spouses slab is 10% or 20%, the 10% TDS implemented by the bank will further complicate matters. The bank will simply deduct 10% (10.3% to be exact) tax on the total interest earned unmindful of the above income clubbing provisions. If the spouse falls under the 10% tax slab he/she may have to seek a tax refund while filing returns for all years the FD is held. If he/she falls under the 20% slab the refund maybe applicable only for a few initial years. Additional tax will have to be paid for the remaining years!

I hope you now agree with me that income clubbing when a taxable instrument is involved is a terrible idea.

If your spouse (or DIL) holds a FD you can use this calculator to figure out individual tax liabilities (or refund) each financial year after accounting for TDS. Individual advance tax liabilities (if applicable) can also be computed.

If someone you know is practising such income clubbing unmindful of rules and complexities involved, do forward them this link.

Do check out these related articles:

About the AuthorM. Pattabiraman(PhD) is the author and owner of freefincal.com. He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Follow @freefincal “Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis.
He conducts free money management sessions for corporates and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)

Want to conduct a sales-free "basics of money management" session in your office?

I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media

Content Policy

Freefincal has original unbiased, conflict-of-interest-free, topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content. We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policyOur website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.

Do check out my books

You Can Be Rich Too with Goal-Based Investing

My first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for ₹199 (instant download)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

Post navigation

12 Comments

Sir, If Wife is working and she is also earning, how it is possible to confirm that amount in FD belongs to Husband (If FD is in Wife name). Clubbing should be when wife has no money (or not earning), then it is confirm that amount in FD belongs to Husband. My doubts is why husband has to pay tax if amount belongs to wife (assuming genuine case) Please clarify

If you give your money to your wife, whether she is earning nothing or ten times more than you, it is still your money and you should pay tax on the income generated from that money. Those are the rules. Every citizen is expected to follow that. You cannot selectively say income clubbing is applicable only when wife is not working.

Of course if the money is genuinely the wife’s then the husband has not tax role to play.

Sir, I confused. You are saying every citizen has to follow irrespective of wife’s earning.But you are also saying in genuine case husband no need to pay tax. Please clarify. How IT will confirm genuine case? Please clarify.

A gem of an article. Just clarifying for clubbing of income of minor child from my article Clubbing of Income An individual shall be entitled to exemption of Rs. 1,500 per annum(p.a.) in respect of each minor child if the income of such minor as included under section 64 (1A) exceeds that amount. However if the income of any minor child is less than Rs. 1,500 p.a. the aforesaid exemption shall be restricted to the income so included in the total income of the individual.

Suppose i gift a certain amount to my wife and she invest it in FD for aperiod of 1 year, so i have to pay tax on the interest earned for that 1 year. Now suppose she agains reinvest the principal amount for another 5 years, so now the income thus generated will be clubbed in my income or will be it be taken as income of my wife?

Hi, I just landed on your page. I need your suggestion. My spouse gave money 2L and I invested on a company for interest and got money back last year. As investment is on my name company deducted TDS under my PAN. Due to slab, the TDS deducted is not complete and I might end up paying more tax. In this situation, Can I get refund of TDS detected with not declaring this money but asking my spouse to declare this money with interest as other income and pay tax? This way can i avoid paying excess tax and also ensuring tax paid for the amount (interest out of 2L) earned? Thanks in advance